Mutual Funds: A Short Introduction to the Noobs

The partner and I have been invested in mutual funds for a little over a year now and it may be safe to say that we already have some knowledge about it enough to share it to other people.

For readers (and friends!) who would like to have a brief introduction with this type of investment, read on. I hope this can clarify at least a bit of your questions regarding mutual funds.

What are mutual funds?

As the illustration above suggests, mutual funds is a type of investment where investors pool their money together to create a large fund. This fund is then invested into different types of securities (stocks, bonds, deposits and many others) so that it can generate returns. The returns can come from interest from borrowing (such as in bonds) or from company growth and dividends (such as in stocks). A portion of the returns are then given back (after management fees and taxes) to the investors which they can choose to withdraw and spend or invest back into the fund.

Where are mutual funds invested?

Where mutual funds are invested would depend on the type of fund. Generally, the aggressive funds are mostly invested in the stock market where there is a high risk (of loss) but also a high potential of big returns. Conservative funds are concerned with capital preservation and are therefore invested in low risk securities such as bonds, treasury bills, deposit accounts such as time deposits and money market funds. The only downside is that they offer very low returns when compared to stocks. Balanced funds are a combination of the two.

Why choose mutual funds?

Mutual funds are often chosen by people who do not wish to learn the art of stock trading or do not have the time to do so. Since mutual funds are managed by a fund manager whose sole job is to study the market and analyze where to put the money in so that it could generate the highest returns at the lowest possible risk, the only thing that an investor has to do is put money into the fund and wait out for the results. The only downside to investing in mutual funds is that management and other similar fees are incurred.

Which mutual fund should I choose?

There are many factors to determine which type of mutual fund to invest on. For example, you may have to be assessed on whether you are an aggressive or a conservative investor or somewhere in between. This can be determined by learning your risk appetite (how much risk can you take? 10% loss? 20%?). One’s investment horizon (or the time you can do without having the money you are planning to invest in your hands) is also a key factor. It may be that you only allow your money a year or three or five before you use it for something else.

Also, young people are generally recommended to become aggressive investors. A huge loss could be possible along the way but because they are still young, getting back the losses and maybe doubling the returns is still very high. Those who are already near retirement age are not recommended to invest in high risk funds because of the big possibility of losing all the money that they have.

How often should I top-up my mutual funds account?

It generally depends upon the investor. Personally, the partner and I put in a little into our mutual funds account every month so that the money could ride along with the highs and lows of the market. We also follow what is called cost averaging (which will be discussed in a future post). Investing a lump sum is also okay.

How long should I stay invested in mutual funds?

This mainly depends on the type of fund that the investor has. However, mutual funds are for long term – it is recommended to stay invested for at least a year even in the funds with the lowest risk. Of course, the funds heavily depend on the behavior of the market and it is still possible to incur losses even after a year. Personally, I would recommend to stay invested for at least three to five years.

To see how much you could potentially earn by investing in mutual funds, check out this post.

If you have any other questions or clarifications, don’t hesitate to put it in the comments section below.

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55 Comments

wow, thank you for the learning. my husband and I have been discussing ‘mutual funds’ as we’ve been invited by his bank. but we didn’t really understand it much, this is detailed enough. now I know it’s really the right way to go for us and stock market is something we can’t afford to gamble on.:)

Hi, what’s the minimum monthly investment for a mutual fund and which banks have it? I am interested on this but I just want to read by myself first. I don’t want to be chatted or talked upon it yet. What dreads me on this kind of topic is that when I start to ask on fb sites, many agents start to talk to you na. I just want the basics and simple figures. Although with several sites I’ve seen, I am not so sure if being techy or complicated on this kind of topic can be averted. Thanks for opening up this topic 🙂

The minimum amount to open an MF account is generally 5K but some could go up to 10K or 20K. Banks don’t have mutual funds but they have a similar product called UITFs. I think the only difference is their insurer. Top-up investment is often a minimum of 1K and it’s optional (you can invest this month or not). If you want to see the top performing funds you can also check out pifa.com.ph. All legitimate mutual funds/UITFs are listed there.

Hi! Thanks for this very clear explanation! How long have you been investing and may I know if there’s return already? I’m thinking of investing in mutual funds, but not sure about the returns kung how many percent pag conservative.

Hmm, we’ve only been invested for about a year so far (and had to withdraw a portion of our fund for some personal reasons). So far, we’ve gained 4% returns (computation ko is from Nov 2013 since the money we invested earlier than that were withdrawn nga..). I think it’s not so bad considering na there was the earthquake and Yolanda as well. It’s twice as much as what you would gain in a savings account in the bank.

For conservative investments, I’m not so sure though. But you can check out pifa.com.ph for reference of how funds are doing. Also take note we’re doing cost averaging, I think yung nakalagay na figures dito is based on lump sum/one time investment.

The banks are offering Fund Management for starters, just like in BDO which they call Easy Investment Plan (EIP). For Convervative (eg. market funds), the return is usually 4%-8%.. For high risk is usually around 12%-16%. I would also add that even though it’s okay to invest lump sum money, I wouldn’t recommend it. It’s better to invest in chunks of money per month (or twice a month) than a bulk in one year. This is because in a 12 month period, the NAVpU for every stock (just in case you are high risk) is always changing. Thus, don’t put all eggs in one basket in one time.

The timing of your post couldn’t have been more perfect. Thanks for sharing, my husband and I are considering this too. We’re just trying to set aside some savings before we invest in mutual funds. A friend advised me not to dip into our savings and that we should use money we could spare.

Yay, I love it when fellow mom bloggers talk about finance, too! While I am more inclined to investing directly in stocks, I can’t say I haven’t considered mutual funds. Is it okay if I ask you which company you have an account with?

Skipping mutual funds is fine if you have the time and knowledge to spend for stocks investing. We have both but we’re still learning the ropes with stocks. We opened a joint account with FAMI because they have the lowest fees, are among the top performers and also because they’re the only ones that have an office here in Cebu. I’m also considering getting a Philequity fund in the future, as I am now connected with IMG. 😀

Thanks Pam for sharing this sincemy husband and I are very interested in both the stock market and mutual funds however I did hear that mutual funds is much better. May I ask what is the minimum amount that you can invest?

Hi Mamanee! 😀 Actually, investing directly to the stock market can give much higher returns but they require time and a lot of knowledge. Most mutual fund accounts can be opened with a minimum of 5K but there are some that need 10K. As for additional investments, the usual minimum amount is 1K.

Good for you for starting to invest early 🙂 We invested too with MF since 2010 and the returns are way better than a savings account or a time deposit. I started also having UITF and just recently attended a seminar on stock market with COL Financial. It is promising too 🙂 The key to investing is choosing a long-term path and doing peso cost-averaging.